Obviously, I have been wrong about the Federal Reserves willingness to pump money into the banking system. I never imagined they could be so careless. But they have been.
When you hold the price of money artificially low for as long as possible, you create asset bubbles, you encourage the inefficient allocation of capital in to ventures that create fiat money, but have no (or very limited) real underlying economic value.
One of the things I have heard from retiree's that I have told to limit their exposure to stocks ever since right before the housing crash is that they hate missing out on the recent gains.
If you got out at the top of the market in the summer of 2008, or better yet shorted it, you saved or made an enormous amount of cash. Now you are disappointed, because you have missed out on the rally, which has indeed been very impressive.
But please, which of your friends will get out at the top again? Do you honestly believe this rally is based on anything rather than bubble economics, coupled with a herd like momentum mentality that has been evident in every run-up since 1990?
http://stockcharts.com/freecharts/historical/djia1900.html
Once again I will point you to a LONGER TIME FRAME than most are willing to look at.
Baby boomers have lived in unprecedented boom times. Not unlike the observer of a scientific experiment that is unable to comprehend his own impact on the outcome of an experiment, the boomers have both bought and sold the "buy and hold" theory....hook, line and sinker.
Imagine you were 65 years old in 1929. You had just lived through the biggest stock market boom in history. Times were good, very good....and you were going to retire comfortably. Until the stock market crashed. If you were not leveraged, and had no debt, perhaps you came out alright, unless your job depended on the economy, which subsequently collapsed.
By the time you were 91 (26 years later), you would have theoretically made your money back. (If the companies you had been invested in didn't cease to exist.)
Most people are able to really start investing when they are in their mid-30's to early 40's. So sure, buy and hold is GREAT, if you were born between 1946 and 1956. Clearly, not everyone was. You boomers have been riding a wave, a wave that you have had a huge part in creating. The wave started to crest and break in the early 2000's, and bubble blowing by the Fed has succeeded in creating the illusion that your wave will never completely break. Like all waves, it will.
The question is not if, but when this will happen.
I believe China is the key. The bubbles have been blown with government debt, which has been largely provided by foreign governments, primarily China.
When China can no longer afford to buy our debt, or decides they want a higher return for doing so (causing a spike in interest rates - where the Fed loses its control over the discount rate), we are in deep trouble. This will be the beginning of the next crash, and it will be massive in scale and long in duration. You will be very glad to have cash, hard real estate assets, and gold. This will position you to be able to take advantage of depressed stock and bond prices, and take advantage of higher yielding, low risk bank products when interest rates spike.
The question then becomes, what will cause China to either stop buying US Treasuries, or even start dumping them, rendering the FED helpless. We got a glimpse into the answer in June:
http://colorinvestmentresearch.com/interbank-lending-spike-a-symptom-of-chinas-deeper-financial-policy-disorder/
http://www.nytimes.com/2013/06/21/business/global/china-manufacturing-contracts-to-lowest-level-in-9-months.html?pagewanted=all&_r=0
http://azizonomics.com/2013/05/03/chinese-treasury-contradictions/
http://www.telegraph.co.uk/finance/china-business/10120716/China-braces-for-capital-flight-and-debt-stress-as-Fed-tightens.html
Kep
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